This standard is formulated in accordance with the "Basic Standard for Enterprise Accounting Standards" and specifies the recognition, measurement, and disclosure of inventory-related information.
I. Definition and Recognition of Inventory
Inventory Definition
Inventory refers to goods held for sale in the ordinary course of business, work-in-process during production, and materials or supplies consumed in production or service delivery.
Confirm Conditions
Inventory is recognized only if it meets the following criteria:
- (1) It is probable that the economic benefits associated with the inventory will flow to the enterprise.
- (2) The cost of the inventory can be reliably measured.
Note: Consumable biological assets are subject to "Accounting Standards for Business Enterprises No. 5 — Biological Assets"; inventory costs accumulated through construction contracts are subject to "Accounting Standards for Business Enterprises No. 15 — Construction Contracts".
II. Initial Measurement of Inventory
Inventories shall be initially measured at cost. Inventory cost includes purchase costs, conversion costs, and other costs.
Procurement Cost
Includes the purchase price, related taxes, transportation fees, loading and unloading charges, insurance premiums, and other costs directly attributable to inventory acquisition.
Processing Cost
Includes direct labor and allocated manufacturing overheads. Manufacturing overhead refers to all indirect expenses incurred by the enterprise in producing products and providing services.
Other Costs
Other costs incurred to bring inventory to its present location and condition, excluding purchase and processing costs.
Expenses excluded from inventory costs
The following expenses shall be recognized as current period costs when incurred:
- (1) Abnormal direct materials, direct labor, and manufacturing overhead.
- (II) Storage costs (excluding costs necessary to reach the next production stage);
- (3) Other expenses that cannot be attributed to bringing inventory to its present location and condition.
III. Methods for Calculating the Cost of Goods Issued
Enterprises shall determine the actual cost of issued inventory using one of the following methods:
FIFO
Assume that the first goods purchased are the first ones issued, and calculate the cost of each issue sequentially based on the purchase order.
Weighted Average Method
Calculated using the weighted average unit cost of beginning inventory and units purchased during the period.
Specific Identification Method
Inventory that cannot be replaced, or inventory acquired or manufactured for a specific project.
Inventory with similar nature and usage shall be accounted for using the same cost method. The cost of sold inventory shall be recognized as expense in the current period.
IV. Provision for Inventory Obsolescence
Measurement Principles
At the balance sheet date, inventory shall be measured atLower of cost and net realizable valueMeasurement. If the cost of inventory exceeds its net realizable value, an inventory write-down provision shall be recognized and charged to current earnings.
Determination of Net Realizable Value
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs to complete and estimated selling expenses and related taxes.
- • Materials held for production: Measured at cost if the net realizable value of the finished goods exceeds their cost.
- • Inventory held to fulfill sales contracts: Net realizable value calculated based on contract price.
- • For inventory quantities exceeding the contract order quantity, calculate the excess based on the standard selling price.
Accrual Method
- • Usually, should followSingle inventory itemaccrue
- • For large quantities of low-unit-cost inventory, you mayInventory Categoryaccrue
- • Inventory items that are related to the same product line produced and sold in the same region and have identical or similar end uses may beconsolidated accrual
Reversal of allowance for decline in value
At the balance sheet date, if the factors that previously caused a write-down in inventory value no longer exist, the amount written down shall be reversed within the limit of the provision for inventory decline previously recognized. The reversal amount shall be included in current period profit or loss.
V. Disclosure Requirements
The enterprise shall disclose the following information related to inventory in the notes:
- (1) Beginning and ending book values of various inventory categories;
- (2) Determine the method used for calculating the cost of goods issued.
- (3) Basis for determining the net realizable value of inventory, method for recognizing inventory provision for impairment, amount recognized in the current period, amount reversed in the current period, and relevant details regarding recognition and reversal.
- (IV) Carrying value of inventory pledged as security.
Regulatory Document Attachment
CAS 1 — Inventories (PDF)